Is Oil Nervous Enough About Iran and The Saudis?

Pricing geopolitical risk premia

Erik Norland, Senior Economist and Executive Director, CME Group
Originally published in the October 2019 issue

It’s now been three weeks since a drone attacked and knocked out half of Saudi Arabia’s oil production and, if one hadn’t read the news and just casually glanced at the futures and options markets, one would never know that anything had been amiss. Oil prices are smack in the middle of their recent range. The 14% up move on Monday the 16th of September looks like a blip on the long-term charts and the oil market has given up most of those gains. 

And why did oil rally only 14%? And why the lack of follow through in subsequent trading sessions? If half of Saudi Arabia’s oil production was knocked out, that’s 6 million barrels per day in lost production, or about 6% of global total production. Past disruptions in oil supply, like the ones that occurred when the Arab Spring protests toppled the government of Libya, produced much bigger reactions. Then a 2-3% drop in global supply, sent prices 15-30% higher. The 1973 Arab Oil Embargo cut global production by about 6% and sent prices 300% higher. The 1979-80 oil shock reduced global supply by about 4% and caused prices to rise by around 200%. 

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